Prospect looms of increase in thrift construction loans.

Great Western gearing up for possible lending spurt

In the latest sign that construction lending activities of healthy thrifts may increase, a Great Western Bank executive last week told the Business Journal that the institution will likely expand its residential real estate construction lending activities next year.

"Our perspective is that there is going to be a housing shortage in California," said Sam Lyons, senior vice president of mortgage banking at Beverly Hills-based Great Western, the second largest savings and loan in the nation. "We will be a player in that market. We are dusting off our procedures and plans and are revamping them to reflect today's environment."

Great Western had $107 million in construction loans on its books at Dec. 31, 1990, down from $557 million at Dec. 31, 1988, according to information from Sheshunoff Information Services of Austin, Texas.

While emphasizing that no definite program is in place, Lyons said the bank expects to be "geared up" to begin such activities by the end of the year. "We will be conservative, I can tell you that," he said.

Lyons said he thinks other healthy S&L institutions will follow suit.

"I know from experience that we all come up with these brilliant ideas at about the same time," he said.

Lyons' statement comes amid comments by Office of Thrift Supervision officials that the regulatory agency is looking for ways to make it easier for institutions to become more involved in residential construction lending.

"We are actively considering ways that we can get you back into that business, (but) not in a fashion that will generate a lot of losses," OTS Deputy Director Jonathan Fiechter told attendees of the California League of Savings Institutions' annual convention in Coronado held Sept. 26. "You don't want that and we don't want that. Nor do we want to limit lending to developers who have sufficient collateral guarantees, etc., so the risk to you is similar to that of a Treasury bill. That's not our intent either."

A representative of the local building industry, stung by lenders' refusals to provide loan extensions to builders whose original construction loans are coming due, expressed skepticism.

"We've been hearing that -- we are waiting to see some performance," said Robert Sutton, director of public affairs for the Building Industry Association of Southern California. "We feel that residential lending is the baby that's been thrown out with bathwater in the whole FDIC-RTC environment. Less than 3 percent of RTC properties are residential developments."

He was referring to the Federal Deposit Insurance Corp., regulatory agency for the banking and thrift industries, and the Resolution Trust Corp., a federal agency charged with selling off failed thrifts' assets. Both are charged with cleaning up the thrift debacle.

An OTS spokesman said that the agency is considering waiving a requirement of the 1989 thrift bailout law that S&Ls maintain capital reserves equal to the total amount of construction loans.

While construction lending is not banned by the landmark Financial Institutions Reform, Recovery and Enforcement Act of 1989, new formulas introduced by the act to measure thrifts' capital adequacy discourage construction lending by requiring S&Ls to have more capital to back such loans.

The law, combined with the recession and the consolidation of the S&L industry, has resulted in a massive reduction in S&Ls' construction lending. Total construction lending by Los Angeles County thrifts fell to $2.5 billion last year from $5.1 billion in 1988, according to Sheshunoff Information Services.

The OTS might make exceptions to the law where homebuilders have sold a house to a customer and the customer has already secured a takeout loan to replace an institution's construction loan to the builder, said OTS spokesman Paul Lockwood.

Such a regulatory attitude marks a dramatic change in the stance of regulators toward S&Ls involved in relatively risky construction lending, said one top S&L official.

"He (Fiechter) said some different things here about construction loans from what he was saying a month ago" before another group of thrift executives, Don Shackelford, chairman of the U.S. League of Savings Institutions, said in an industry newsletter.

The Treasury Department was also expected to introduce new appraisal guidelines last week for examiners in the OTS and Office of the Comptroller of the Currency, which is responsible for regulating banks. The new rules would order examiners to evaluate institutions' collateral under "normal circumstances" rather than current recessionary conditions.

While some may welcome easier construction loan standards as an effort to reduce the credit crunch, to others it raises the specter of the sort of risky 1980s S&L lending that got the industry into trouble at the taxpayers' ultimate expense.

"I think S&Ls would get burned again," said Campbell Chaney, an analyst at San Francisco-based stock brokerage Sutro & Co. "They'd be (making construction loans) almost at the prodding of the regulators . . . not on good economics."

In the go-go years of the 1980s, many developers or self-styled developers either acquired thrifts or paid kickbacks to thrift owners to invest large sums in dicey real estate development ventures.

Even at S&Ls where no fraud was present, poorly issued residential construction loans have added to the woes. Chaney notes that at San Diego-based HomeFed Bank, which recently announced a huge quarterly loss and may be seized by regulators, 15 percent of that company's nonperforming assets are loans on land for residential development.

One S&L executive emphasized, however, that construction loans don't have to be risky. "There are various types of construction loans," said William Hegg, chairman and president of Sacramento Savings Bank. "Some are financing for homes with a proven contract for a client. To me, that's excellent collateral."

Chaney said that the regulatory loosening is an effort of the Bush Administration to jumpstart the economy out of the recession before the 1992 presidential election.

Some S&Ls plan to steer clear of construction lending even if it becomes less regulated.

"It's not something we'd consider in the near future because it's not part of our core business, which is residential (mortgage) lending," said Mary Trigg, a senior vice president with Home Savings of America of Irwindale.